What Is the FASB Definition of an Asset?

The Financial Accounting Standards Board (FASB) is the organization responsible for establishing and maintaining the set of generally accepted accounting principles (GAAP) in the United States. These standards govern how public and private companies prepare their financial statements, ensuring a common language for business reporting. The fundamental terms used in accounting must have precise and universally applied meanings. A clear definition for a term like “asset” dictates what a company can report as a resource on the balance sheet. This consistency allows investors, creditors, and other stakeholders to compare the financial health of different companies with a higher degree of confidence.

The Core Definition of an Asset

The FASB provides a specific definition of an asset within its Conceptual Framework, which serves as the theoretical foundation for accounting standards. In Concepts Statement No. 8, an asset is defined by two characteristics: it is a “present right” that contains an “economic benefit.” This definition acts as the test for what qualifies as a reportable resource for a company before it can be considered for inclusion on the balance sheet.

This has direct practical implications for accountants and financial auditors. When a company acquires something of value, from a piece of machinery to a patent, it must be assessed against this definition. The definition provides the core criteria that separate a true economic resource of the entity from other items that might be valuable but do not belong to the company in an accounting sense.

The Two Essential Characteristics

A Present Right

The first characteristic is that an asset is a “present right.” This means the company currently has an established right to the economic benefit, and this right is a result of a past transaction or event. This anchors the asset’s existence to a historical occurrence, preventing companies from recording assets based on future hopes or intentions. The right also gives the company the power to obtain the economic benefits from the resource and restrict others’ access to them.

To illustrate, a building owned by a company is an asset because the purchase is a past event that gives the company the legal right to use the property or to sell it. It can also legally prevent others from using it. Contrast this with a public park located next to the company’s headquarters. While the park may be beneficial, the company has no present right to control it, so the park cannot be recorded as the company’s asset.

An Economic Benefit

The second characteristic is that the right must be to an “economic benefit.” This means the item has the potential to contribute, either directly or indirectly, to the company’s future cash flows. An obvious example is inventory, which a company holds with the clear expectation of selling it for cash. Similarly, a piece of manufacturing equipment provides an economic benefit by being used to produce goods that will be sold, thus contributing indirectly to cash inflows.

This concept also extends to intangible items. A patent, for instance, provides the exclusive right to a product or process, which can be used to generate revenue and prevent competitors from doing the same.

Application on the Balance Sheet

Meeting the two-part definition of an asset is only the first step. For an item to be formally recorded, or “recognized,” on the balance sheet, it must also meet additional criteria. According to the FASB’s framework, an item should be recognized if it is measurable and can be depicted and measured with faithful representation. Faithful representation means the measurement is complete, neutral, and verifiable.

Consider a company’s internal reputation for innovation or its highly skilled workforce. These attributes provide an economic benefit, and the company has a right to them as a result of past events like hiring and training. They meet the definition of an asset.

Despite meeting the definition, these items are generally not recognized on the balance sheet because it is exceptionally difficult to assign a reliable and objective dollar value to them. Because of this measurement uncertainty, U.S. GAAP prohibits the recognition of most internally generated intangible assets.